SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended December 31, 1996

                                       OR

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                        For the transition period from to

                           Commission File No.: 1-5270

                              SOFTNET SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

              New York                                 11-1817252
   --------------------------------        ---------------------------------
   (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)

    717 Forest Avenue, Lake Forest, Illinois               60045
   ------------------------------------------          --------------
   (Address of principal executive offices)              (Zip Code)

Registrant's telephone number, including area code:  (847) 266-8150

                                 Not Applicable
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                    Yes X    No
                                       ---     ---

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

              Class                           Outstanding at December 31, 1996
  -------------------------------             --------------------------------
  Common stock, without par value                       6,564,455

<PAGE>

                              SOFTNET SYSTEMS, INC.
                                      INDEX



                                                                         Page
                                                                        Number
                                                                        ------

PART I    FINANCIAL INFORMATION

 Item 1.  Financial Statements (Unaudited)

           Condensed Consolidated Balance Sheets
               December 31, 1996 and September 30, 1996                    3

           Condensed Consolidated Statements of Operations
               for the Three Months Ended
               December 31, 1996 and December 31, 1995                     4

           Condensed Consolidated Statements of Cash Flows
               for the Three Months Ended
               December 31, 1996 and December 31, 1995                     5


 Item 2.   Management's Discussion and Analysis of
               Financial Condition and Results of Operations               8


PART II    OTHER INFORMATION

 Item 6.   Exhibits and Reports on Form 8-K                               10


SIGNATURES                                                                10

<PAGE>


                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                        (In thousands, except share data)
                                  (Unaudited)

                                                       Dec. 31,    Sept. 30,
                                                         1996        1996
                                                       --------    --------
                                                     (unaudited)
         ASSETS
Current assets:
   Cash .............................................  $     60    $    426
   Receivables, net .................................     7,808       6,074
   Inventories ......................................     5,130       5,904
   Prepaid expenses .................................       235         340
                                                       --------    --------
          Total current assets ......................    13,233      12,744

Property and equipment, net .........................     1,840       2,314
Available-for-sale securities .......................         4           4
Costs in excess of fair value
  of net assets acquired, net .......................     7,790       8,101
Other assets ........................................     2,722       2,423
                                                       --------    --------
                                                       $ 25,589    $ 25,586
                                                       ========    ========

         LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accrued expenses ............  $  7,294    $  8,672
   Current portion of long term debt ................       638         744
   Current portion of capital leases ................       103         187
   Deferred revenue .................................     1,710       1,428
                                                       --------    --------
          Total current liabilities .................     9,745      11,031
                                                       --------    --------

Long term debt, net of current portion ..............    11,610      10,598
                                                       --------    --------

Capital Lease obligation,
  net of current portion ............................        84         164
                                                       --------    --------

Commitments and contingencies

Shareholders' equity:
   Preferred stock, $.10 par value,
     4 million shares authorized,
     none outstanding ...............................        --          --
   Common stock, $.01 par value,
     25 million shares authorized,
     6,564,455  and 5,547,033 shares
     outstanding, respectively ......................        66          65
Capital in excess of par value ......................    33,617      33,517
Accumulated deficit .................................   (29,533)    (29,789)
                                                       --------    --------
          Total shareholders' equity ................     4,150       3,793
                                                       --------    --------
                                                       $ 25,589    $ 25,586
                                                       ========    ========

<PAGE>


                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)
                                  (Unaudited)

                                                            Three Months Ended
                                                               December 31,
                                                          ---------------------
                                                            1996           1995
                                                          --------     --------
Net sales ............................................    $ 10,778     $  9,872
Cost of sales ........................................       6,648        6,402
                                                          --------     --------
   Gross profit ......................................       4,130        3,470
                                                          --------     --------

Operating expenses:
   Selling ...........................................       1,294        1,124
   Engineering .......................................         550          404
   General and administrative ........................       1,374        1,424
   Amortization of goodwill and transaction costs ....         362          457
                                                          --------     --------
             Total operating expenses ................       3,580        3,409
                                                          --------     --------

   Income from continuing operations .................         550           61

Interest expense .....................................        (256)        (395)
Other income (expense) ...............................         (39)          11
                                                          --------     --------

   Income (loss) before income taxes .................         255         (323)

Provision for income taxes                                      --           --
                                                          --------     --------

   Net income (loss) .................................    $    255     $   (323)
                                                          ========     ========

Earnings (Loss) per share ............................    $   0.04     $  (0.06)
                                                          ========     ========

Weighted average shares outstanding ..................       6,806        5,547
                                                          ========     ========
<PAGE>

                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                  (Unaudited)

                                                             Three Months Ended
                                                                December 31,
                                                            --------------------
                                                              1996        1995
                                                            --------    --------
Cash flows from operating activities:
  Net income (loss) ....................................... $    255    $  (323)
  Adjustments to reconcile net income (loss)
    to net cash used by operating activities:
       Depreciation and amortization ......................      517        534
       Provision for bad debts ............................        8         14
       Changes in operating assets 
         and liabilities, net of effect of
         purchase transactions:
           Receivables ....................................   (1,895)       345
           Inventories ....................................      (87)      (370)
           Prepaid expenses ...............................      106         79
           Accounts payable and accrued expenses ..........     (311)    (1,419)
           Deferred revenue ...............................      535        450
                                                            --------    --------
             Net cash used in operating activities ........     (872)      (690)
                                                            --------    --------

Cash flows from investing activities:
  Purchase of property and equipment ......................      (55)      (181)
  Additions to capitalized product design .................     (155)       (64)
  Increase in other assets ................................       11       (242)
  Net cash paid in connection with acquisitions ...........       --        (99)
  Settlement of remaining obligations to owners of
    discontinued operations ...............................       --       (116)
                                                            --------    --------
             Net cash used by investing activities ........     (199)      (702)
                                                            --------    --------

Cash flows from financing activities:
  Repayment of long-term debt .............................      (33)       (41)
  Borrowings under revolving credit note ..................    2,556      2,559
  Payments under revolving credit note ....................   (1,769)    (1,000)
  Payment for put obligation ..............................     --         (200)
  Capitalized lease obligations paid ......................      (49)       (70)
                                                            --------    --------
             Net cash provided by financing activities ....      705      1,248
                                                            --------    --------

Net decrease in cash ......................................     (366)      (144)
Cash, beginning of period .................................      426        573
                                                            --------    --------
Cash, end of period ....................................... $     60    $   429
                                                            ========    ========

Cash paid during the period for:
Interest ..................................................  $   244    $   340
Income taxes ..............................................       --         --

Supplemental non-cash transactions
Businesses acquired with issuance of stock and notes ......       --      1,761
Change in unrealized appreciation 
  in available-for-sale securities ........................       --        661

<PAGE>

                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
              Notes to Condensed Consolidated Financial Statements
                           December 31, 1996 and 1995
                                   (Unaudited)


1.  Basis of Presentation

The  financial  information,  except for  the balance  sheet as of September 30,
1996,  included  herein is unaudited;  however,  such  information  reflects all
adjustments  (consisting  solely of normal recurring  adjustments) which are, in
the opinion of management,  necessary for a fair  presentation  of the condensed
consolidated  statements of financial  position,  results of operations and cash
flows as of and for the interim periods ended December 31, 1996 and 1995.

The  Companys's  annual report on form 10-K for the fiscal year ended  September
30, 1996, as filed with the Securities and Exchange  Commission,  should be read
in  conjunction  with  the   accompanying   condensed   consolidated   financial
statements.  The condensed  consolidated  balance sheet as of September 30, 1996
was derived from the Company's audited Consolidated Financial Statements.

The results of operation for the three months ended  December 31, 1996 are based
in part on  estimates  that may be subject to year-end  adjustments  and are not
necessarily indicative of the results to be expected for the full year.


2.  Debt

Debt is summarized as follows (in thousands):

                                     December 31, 1996      September 30, 1996
                                     -----------------      ------------------
                                        (Unaudited)

  Bank Debt                                     $6,960                  $6,649
  Convertible subordinated notes                 3,911                   4,011
  Other                                          1,377                     682
                                    -------------------     ------------------
                                                12,248                  11,342
  Less current portion                            (638)                   (744)
                                    -------------------     ------------------

                                               $11,610                 $10,598
                                    ===================     ==================


During  the three  months  ended  December  31,  1996,  the  Company  received a
temporary  increase in its  borrowing  facility  whereby the Company was able to
borrow $1.0 million in excess of available  assets.  Subsequent  to December 31,
1996, the Company  extended the temporary  increase  whereby the Company will be
able to borrow  $1.0  million  in excess of  available  assets for the months of
January and February  1997,  $750,000 for March 1997, and $500,000 for the month
of April  1997.  On May 1,  1997,  the  amount  of  credit  available  under the
revolving  credit facility will revert to the original  amount  available not to
exceed $9.5 million. In addition,  the Company extended the maturity date of its
revolving credit facility to January 15, 1998.


<PAGE>




3.  Stock Options and Warrants

Outstanding  options and warrants to purchase shares of common stock at December
31, 1996 were as follows (in thousands, except price per option data):

  Outstanding at beginning of year                        1,569

  Granted (at $4.94)                                        245

  Exercised or canceled (at $8.25)                          (14)
                                                        --------

  Outstanding at June 30, 1996                            1,801
                                                        ========


In November 1996 the Company repriced 312,167 Employee Stock Options by reducing
the  exercise  price from $8.25 to $4.94 per share (the market price on the date
of such change).


4.  Reclassifications

The Company has reclassified certain general and administrative expenses as cost
of goods sold for the three months  ended  December 31, 1995 to conform with the
current year presentation.


<PAGE>


Item 2.
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations


Results of operations  for the three months ended  December 31, 1996 compared to
the same period in 1995.

For the three months ended  December 31, 1996,  net sales  increased by $906,000
(or 9.2%) to $10.8 million compared to $9.9 million for the same period in 1995.
Sales increased in the Company's  document  management  division by $836,000 (or
18.2%) principally as a result of higher volume of units sold as compared to the
same  period  in the  prior  year.  Sales  in the  Company's  telecommunications
division  decreased  $152,000  (or  2.9%).  The  decrease  was a  result  of the
disposition  of  the  operations  of  the  Company's  wholly  owned  subsidiary,
Communicate  Direct,  Inc.  ("CDI")  (with revenue of $2.0 million for the three
months  ended  December  31,  1995),  which  was  offset by the  acquisition  of
Executone      Information     Systems,      Inc.'s     Milwaukee     operations
("Executone-Milwaukee")  (which  added $1.3  million  to  revenue  for the three
months ended December 31, 1996). The Company's Internet Services division, which
was acquired in June 1996 (i.e. MediaCity World, Inc.) added $269,000 to revenue
for the three months ended December 31, 1996.

For the three months ended December 31, 1996,  gross profit  increased  $660,000
(or 19.0%) to $4.1 million  from $3.5  million for the same period in 1995.  For
the three months ended December 31, 1996,  gross profit as a percentage of sales
increased from 35.1% in 1995 to 38.3% in 1996. The percentage  increase  relates
primarily  to increases in gross  profit in the  Company's  document  management
division  due  to  increased   productivity  in  the  division's   manufacturing
operations.

Selling, engineering, general and administrative expenses increased $266,000 (or
9.0%) to $3.2  million for the three  months  ended  December 31, 1996 from $3.0
million for the same period in 1995. The decrease in operating  expenses  caused
by the  disposition  of CDI  ($498,000  for the three months ended  December 31,
1995) was offset in part by the  acquisitions of  Executone-Milwaukee  ($260,000
for the three months ended  December 31, 1996) and  MediaCity  ($224,000 for the
three months ended December 31, 1996).  In addition,  the Company  increased its
sales force in both the document management and telecommunications divisions.

Amortization expense decreased $95,000 (or 21%) to $362,000 for the three months
ended December 31, 1996, from $457,000 for the same period in 1995. The decrease
in  amortization  expense was caused by the  write-off  of CDI  goodwill in June
1996,   which  resulted  from  CDI's  sale  of  the   non-application   oriented
interconnect business located in Chicago, Illinois.

Interest  expense  decreased  $139,000 (or 35%) to $259,000 for the three months
ended  December 31, 1996 from  $395,000 in the three  months ended  December 31,
1996.  Interest expense  decreased as a result of lower debt outstanding  during
the three  months ended  December 31, 1996  compared to the same period in 1995.
The  decrease  in  outstanding  indebtedness  was  principally  a result  of the
conversion of $4.1 million convertible subordinated notes in June 1996.

For the three months ended December 31, 1996, net income  increased  $578,000 to
$255,000 and income per share increased $.10 to $.04,
compared to the same period in 1995.


<PAGE>


Liquidity and Capital Resources

At December 31, 1996,  the  Company's  current  ratio was 1.36 to 1 with working
capital of $3.5  million.  This  compares  with a current ratio of 1.16 to 1 and
working capital of $1.7 million at September 30, 1996.

For the three  months  ended  December  31,  1996,  cash flows used by operating
activities were $872,000, compared to $690,000 for the same period in 1995. Cash
flows used by  investing  activities  were  $199,000  for the three months ended
December 31, 1996 compared to $702,000 for the same period in 1995. The decrease
in cash used in investing  activities  was primarily a result of amounts paid in
fiscal 1995 for settlement to owners of discontinued operations and others. Cash
flows provided by financing  activities were $705,000 for the three months ended
December 31, 1996 compared to $1.2 million for the same period in 1995.

During  the three  months  ended  December  31,  1996,  the  Company  received a
temporary  increase in its  borrowing  facility  whereby the Company was able to
borrow $1.0 million in excess of available  assets.  Subsequent  to December 31,
1996, the Company  extended the temporary  increase  whereby the Company will be
able to borrow  $1.0  million  in excess of  available  assets for the months of
January and February  1997,  $750,000 for March 1997, and $500,000 for the month
of April  1997.  On May 1,  1997,  the  amount  of  credit  available  under the
revolving  credit facility will revert to the original  amount  available not to
exceed $9.5 million. In addition,  the Company extended the maturity date of its
revolving credit facility to January 15, 1998.

The Company expects to be able to finance its working capital  requirements  and
capital  expenditures  from its  operating  income and  existing  line-of-credit
facility for the fiscal year ended September 30, 1997.

This Form 10-Q contains "forward looking  statements"  within the meaning of the
Private Securities Litigation Reform Act of 1995, including (without limitation)
statements as to  expectations,  beliefs and future  financial  performance  and
assumptions  underlying  the  foregoing  relating to the ability to meet working
capital  requirements,   capital  expenditures,  and  expected  cash  flow  from
operations.  The actual results of outcomes could differ  materially  from those
discussed in the  particular  forward  looking  statements  based on a number of
factors, including (i) changes in economic conditions and (ii) pricing and other
actions taken by competitors.


<PAGE>


PART II. OTHER INFORMATION

Item 6 - Exhibits and Reports on Form 8-K

          (a)  Exhibits

          Exhibit 27:  Financial Data Schedule

          (b)  Reports on Form 8-K
No reports  on Form 8-K were  filed by the  Company  during  the  quarter  ended
December 31, 1996.


SIGNATURES

In accordance with the requirements of the Securities  Exchange Act of 1934, the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.

                                          SoftNet Systems, Inc.



                                          /s/ John J. McDonough
                                          ------------------------------------
                                          John J. McDonough
                                          Chairman and Chief Executive Officer



                                          /s/ Martin A. Koehler
                                          ------------------------------------
                                          Martin A. Koehler
                                          Vice President - Finance and
                                            Chief Financial Officer

Dated:  February 14, 1997